Great Western Strives to Overcome S&L; Limits, Become More Bank-Like
Great Western Financial Corp.’s new chief executive, John F. Maher, has a dilemma. The Chatsworth-based parent of Great Western Bank, the nation’s second-largest savings and loan with $45 billion in assets, managed to survive the thrift industry crisis of the 1980s and the California recession of the 1990s, and now is looking to have a good year. It has successfully diversified into banking services and rebuilt its profit. Its problem loan portfolio is under control, and costs have been slashed.
Problem is, no matter how hard Great Western works at becoming more bank-like, it’s still a thrift, and it will stay one until Congress decides otherwise. That means it remains confined to certain lines of relatively unprofitable businesses that will keep its profit rather dismal compared with real banking companies such as BankAmerica Corp. and Wells Fargo & Co.
Great Western’s return on equity, a common measure of profitability, was only 10% last year, compared with more than 20% for big banks such as Wells Fargo and First Interstate Bancorp.
Maher is aiming for a 15% return on equity, but some analysts say that goal may be unreachable as long as Great Western is a thrift.
The long-term outlook for the industry “is bad, it’s dismal,” said Campbell Chaney at Rodman & Renshaw in San Francisco. “The thrifts are slowly going out of business as an industry. That’s why you’re seeing Great Western transform into a bank.”
However, that change can only go so far as long as Great Western remains hamstrung by the thrift charter, which requires it, for instance, to keep 60% of its assets in home mortgage loans. Congress has tabled the issue for now, but most observers expect eventually a single charter for banks and thrifts.
Meanwhile, though, “investors aren’t going to tolerate mediocre investment returns or profitability,” Chaney said. “They will force thrifts into the arms of others, if necessary.”
The banking industry is already undergoing a consolidation. First Interstate just agreed to be gobbled up by Wells Fargo. But few big California banks are left for the taking. So a thrift such as Great Western, with its large California market share, is considered a prime takeover target for out-of-state banks such as First Bank System Inc. of Minneapolis--the losing bidder for First Interstate--or NationsBank Corp. of Charlotte, N.C. Some observers expect a suitor to emerge this year.
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Great Western, which operates 26 branches with total deposits of $1.84 billion in Orange County, isn’t the only California thrift struggling to break free of its savings and loan fetters, and it’s certainly not the only one thought to be a likely takeover candidate. For instance, Glendale Federal Bank recently waved a flag to potential buyers by saying the best future for it would be for it to be acquired by a bank.
Maher, 52, isn’t making any similar pronouncements. But he doesn’t discount the possibility that Great Western might soon entertain a takeover bid.
“My job,” he said, “is certainly not to create an ugly duckling.”
Formerly chief operating officer, Maher took the reins from longtime chief James F. Montgomery on Jan. 2. Montgomery, 61, remains chairman and will concentrate on lobbying issues.
It was Maher--a savvy, straight-talking former investment banker--who engineered the move into banking services. Although not unique, Great Western was among the first and has remained one of the most aggressive thrifts with that strategy.
Savings and loans take in depositors’ money in certificate of deposit accounts, then use the money to make residential mortgage loans. It’s a low profit-margin business that’s highly sensitive to economic swings.
So Great Western pushed into fee-based businesses, such as checking accounts--banks’ bread and butter. It began offering consumer loans, credit cards and mutual funds. It built a mortgage business outside California.
“We’re not going to compete with Wells Fargo or Bank of America, and syndicate a loan to Brazil or to General Motors,” Maher said. “But we have the distribution system, and we have the account relationships with our retail customers. If we just do a better job at serving a broader array of their needs, we will automatically become more bank-like.”
Analysts say Great Western is doing a good job so far, given its limitations.
“The past couple of years, every thrift in the state has been trying to collect more transaction accounts. But Great Western still leads the pack in that,” said James M. Marks, an analyst at Hancock Institutional Equity Services in San Francisco. “They’ve found themselves in a place that a lot of other thrifts in the state want to be.”
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The situation was rockier just a few years ago. In the early ‘90s, Great Western boosted its reserves to pay for loan losses, a reflection of California’s sickly real estate market, and profit plummeted.
By 1994, Great Western’s profit rebounded to $251 million, from $62 million in 1993. Last month, the company reported a 1995 profit of $261 million.
This year, Great Western could have luck on its side. If interest rates continue edging downward, it would provide a profit windfall to S&Ls; because the rates they charge borrowers would fall more slowly than the rates paid to customers for CDs and other accounts.
Other moves by Great Western are also starting to help its bottom line. In the early ‘90s, Great Western was the second-biggest buyer of assets from Resolution Trust Corp., the now-defunct federal agency that had been responsible for cleaning up troubled thrifts. It acquired assets of more than a dozen failed thrifts, including the Southern California branches of San Diego-based Homefed Bank.
Although it picked up deposits on the cheap, Great Western began shrinking its bloated infrastructure. Since December 1993, it has cut its work force by 2,400, to 14,600.
But Great Western’s top executives remain well-paid. In 1994, Maher received about $1.2 million in compensation, plus stock options.
Nonetheless, the road ahead will be bumpy. This year, analysts expect Great Western’s net income to be reduced by about $145 million because of a one-time assessment for its share of an industrywide recapitalization of the national thrift deposit insurance fund.
The assessment would be the final payment for the cleanup from the savings and loan crisis. Although its fate is tied to the budget-reconciliation bill being thrashed out between the White House and Congress, the provision is expected to survive negotiations.
Savings and loans agreed to the provision because the bill would also keep banks paying the same insurance rates as thrifts. Earlier proposals would have slashed banks’ deposit insurance premiums.
Great Western had been so adamant about the issue that last March it took the extraordinary step of applying for bank charters in California and Florida. It was an unusual approach because Great Western proposed starting bank branches side-by-side with its savings and loan branches--and then enticing its thrift customers over.
Soon, other thrifts followed suit, putting pressure on Congress to cut a deal on the insurance issue.
Great Western’s earnings could also take a hit from two lawsuits that accuse it of fraudulently marketing mutual funds. One complaint was filed in October 1994 in Los Angeles County Superior Court and seeks the recovery of what plaintiffs say were Great Western’s $250 million in profit on the funds, plus punitive damages.
A federal class-action lawsuit was filed in early 1995 in Los Angeles and seeks $90 million in damages. Both suits allege that Great Western employees misled investors into thinking the funds were federally insured.
Great Western denies the allegations. Settlement talks are scheduled for this month. Maher contends any payment wouldn’t be a “material financial event.”
The bigger worry, said Barry Rubens, president of California Research Corp., a Santa Monica bank-consulting firm, is simply that “Great Western is not as profitable as it should be.”
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Great Western In Orange County
Great Western Bank’s 26 Orange County branches have a combined total of $1.84 billion in deposits and employ 571 people.
Anaheim Hills
* 5791 E. Santa Ana Canyon Road
Brea
* 270 S. State College Blvd.
Park
* 8020 Stanton Ave.
Costa Mesa
* 3200 Park Center Drive
* 234 E. 17th St.
Fountain Valley
* 18517 Brookhurst St.
Laguna Road
* 3334 E. Yorba Linda Blvd.
Beach
* 16141 Beach Blvd.
* 2111 Main St.
Irvine
* 5392 Walnut Ave.
* 3978 Barranca Parkway
* 4543 Campus Drive
Laguna Hills
* 24100 El Toro Road
* 25381 Alicia Parkway
Laguna Niguel
* 28131 Crown Valley Parkway
Mission Viejo
* 27752 Vista Del Lago
* 27888 Santa Margarita Parkway
Newport Beach
* 450 Newport Center Drive
Orange
* 1915 N. Tustin St.
San Clemente
* 390 Camino De Estrella
San Juan Capistrano
* 31972 Camino Capistrano
Santa Ana
* 1701 N. Main St.
Seal Beach
* 2999 Westminster Ave.
Newport Ave.
Yorba Linda
* 20385 Yorba Linda Blvd.
Source: Great Western Financial Corp.
Researched by JANICE L. JONES / Los Angeles Times
